DO AMERICANS WANT THE U.S. TO LEAVE THE WTO?

Free Trade Agreements, Global Trade Daily, International Trade

DO AMERICANS WANT THE U.S. TO LEAVE THE WTO?

August 5th, 2020 Anne Kim Leave a comment

TradeVistas’ inaugural survey of Americans’ attitudes toward trade shows a plurality support the idea, but most Americans seem unsure of the WTO’s role

Earlier this spring, the U.S. Congress faced the possibility of a vote – the first since 2005 – on whether the United States should withdraw from the World Trade Organization (WTO), a body it helped create.

Leading the effort was Missouri Republican Sen. Josh Hawley, a vocal WTO critic who has called to “abolish” the organization, accusing it of unfairness to U.S. interests and favoritism toward China. Although a procedural issue ultimately scuttled a vote, Hawley’s legislation amplified growing criticism of the WTO, including by the Trump Administration.

But what do ordinary Americans think?

A new poll by TradeVistas, conducted by Lincoln Park Strategies, finds that while a plurality of Americans support leaving the WTO, most Americans either oppose the idea or are unsure what to think. Our poll also finds that while Americans overwhelmingly want the United States to be “the leader of the global economy,” most Americans don’t see membership in the WTO as critical to that goal. These responses imply that most Americans are relatively unaware of the WTO’s role, and that the benefits of U.S. participation are far from obvious to the general public. The results also imply that any momentum for U.S. withdrawal largely reflects the work of a motivated minority, versus a groundswell of public will.

A plurality of Americans support leaving the WTO – but almost as many are “unsure” or “indifferent.”

TradeVistas’ July 2020 survey of 1,000 adults found that 36 percent of Americans support leaving the WTO, including 19 percent who “strongly support” U.S. withdrawal and 17 percent who “somewhat support” the idea. In contrast, 35 percent of Americans say they are “indifferent” or “unsure,” while 28 percent oppose withdrawal, including 18 percent who “strongly” object to the idea.

Our survey found that 45 percent of men (versus 29 percent of women) approve of leaving the WTO, including 48 percent of white men and 37 percent of men of color. Fully 25 percent of all men “strongly” support the idea, versus only 14 percent of women who feel the same. We also found that 51 percent of men under age 45 support the idea, as do 66 percent of Republican men.

These results, however, reflect broader generational and partisan splits. Overall, 41 percent of Americans under age 45 want the U.S. to leave the WTO as do 57 percent of Republicans. In contrast, the respondents most likely to oppose withdrawal are those over age 65 (42 percent) and Democrats (49 percent). Responses did not differ significantly by education level or by income.

When voters understand the role of the WTO, they are more likely to be supportive of it.

Despite Americans’ seeming indifference or, in some cases, hostility toward U.S. participation in the WTO, many Americans also see how the organization can benefit U.S. companies – once they receive some basic information about the WTO’s role.

After being told that “the job of the WTO is to enforce a set of rules for international trade that the members negotiated, and 164 countries agreed to follow,” 49 percent of survey respondents said it was “definitely true” or “probably true” that “WTO rules help U.S. companies compete on fair terms,” while 48 percent agreed it was definitely or probably true that “WTO rules stop foreign governments from applying unfair requirements to U.S. companies.”

Those most likely to say these statements are true were also those most opposed to the United States’ leaving the WTO. In fact, a whopping 74 percent of those who “strongly” oppose withdrawal say that WTO rules help U.S. compete, while 67 percent say the WTO stops foreign governments from discriminating against U.S. companies.

Interestingly, however, a majority of the respondents who support WTO withdrawal also believe these statements to be true. For instance, 53 percent of those who “strongly” support leaving say the WTO helps companies compete, while 55 percent say the WTO blocks unfair trade rules. This response suggests that for some Americans, opposition to WTO participation could be a “gut-level” response potentially open to tempering.

Americans want the U.S. to lead the global economy – but don’t see how the WTO can help.

By overwhelming margins – regardless of gender, age, party or race – Americans want to see their country “be the leader of the global economy.” Fully 79 percent of those surveyed rated this goal to be important, including 39 percent who called it “very important.”

Most Americans, however, don’t see WTO membership as instrumental to America’s economic success. When asked if WTO withdrawal “would help or hurt the United States standing as a global leader,” 33 percent of Americans said it would “definitely help” or “probably help,” while 18 percent said “it wouldn’t make a difference” and 13 percent were unsure. Just 36 percent said it would “definitely hurt” or “probably hurt” the United States’ global economic standing to leave the WTO.

Not surprisingly, those most likely to say that withdrawal would help the U.S. are among the minority who also strongly support leaving the organization. Of those who “strongly” support withdrawal, 58 percent also say this would “definitely help.” In contrast, among those who strongly oppose withdrawal, 70 percent say it would “definitely hurt.” It’s worth remembering, however, that both of these groups are relatively small subsets, substantially outnumbered by those who are indifferent, unsure, or have malleable views.

Conclusions

The TradeVistas poll findings suggest that the majority of Americans have formed no real opinion on the WTO and that strong support for withdrawal is limited to a minority of – albeit potentially vocal – voters. Even among these Americans, however, it’s possible that their support for withdrawal is based less on deep knowledge of the WTO than on partisan leanings or a general distrust toward institutions. Importantly, more than 40 percent of adults under the age of 45 support withdrawal from the WTO, with an equal amount simply indifferent or unsure.

Without question, our survey is limited in its scope and offers only the briefest of snapshots on American attitudes toward a global institution of long standing and enormous impact. What is clear, however, is that the vacuum of general public knowledge on the WTO could easily be filled by its detractors, if the organization’s defenders allow it.

Methodology: 1000 interviews among adults age 18+ were conducted from July 10-13, 2020 by Lincoln Park Strategies using an online survey. The results were weighted to ensure proportional responses. The Bayesian confidence interval for 1,000 interviews is 3.5, which is roughly equivalent to a margin of error of ±3.1 at the 95% confidence level.

Download the infographic:

Lincoln Park Strategies National Voter Poll Results

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Anne Kim is a contributing editor to Washington Monthly and the author of Abandoned: America’s Lost Youth and the Crisis of Disconnection, forthcoming in 2020 from the New Press. Her writings on economic opportunity, social policy, and higher education have appeared in numerous national outlets, including the Washington Monthly, the Washington Post, Governing and Atlantic.com, among others. She is a veteran of the think tanks the Progressive Policy Institute and Third Way as well as of Capitol Hill, where she worked for Rep. Jim Cooper (D-TN). Anne has a law degree from Duke University and a bachelor’s in journalism from the University of Missouri-Columbia.

This article originally appeared on TradeVistas.org. Republished with permission.

Archives, Global Logistics, Global Trade Daily, Rail, Trucking

RURAL INFRASTRUCTURE CONNECT AMERICA’S FARMERS WITH THE WORLD

July 29th, 2020 Sarah Hubbart Leave a comment

Infrastructure helps U.S. farmers compete in global markets while improving their productivity here at home.

On the Surface

America’s surface transportation system includes railways, roads, bridges and waterways. Each play an important role in moving farm products from where they are grown to customers around the world. And broadband Internet – another form of infrastructure – brings market information to farmers faster than ever before.

But: our deteriorating bridges and roadways threaten American agriculture’s dominance by slowing down shipments and making exports more expensive. Meanwhile, 60 percent of farmers say they don’t have enough Internet connectivity to run their businesses.

In his 2019 State of the Union address, President Trump included a call to action to rebuild America’s infrastructure. In July 2020, the U.S. House passed its first infrastructure package since 2016. Will this renewed interest in infrastructure from the White House and on Capitol Hill give U.S. agriculture a reason for optimism during an otherwise challenging year?

The Transportation Cost Edge

In 2018, $139.6 billion in American farm products were exported around the world, supporting more than 1 million jobs around the country, including 691,000 non-farm jobs, according to the U.S. Department of Agriculture. We sell more food, fiber and renewable fuel to world markets than we import, creating a positive agricultural trade balance.

Then the COVID-19 pandemic brought new uncertainties for America’s farmers. Total U.S. agriculture exports in FY 2020 are projected to fall to $136.5 billion due to a rollback in commodities like soybeans, cotton, corn, and wheat. And for soybeans, the trade situation is especially complicated. Aside from the impacts of the ongoing U.S.-China trade war, U.S. soybean exports are falling in part due to increasingly competitive Brazilian exports. Lower transportation costs are part of what gives Brazil’s exporters an edge.

The United States’ historically low cost of transport from farms to export markets has been one of the keys to its competitiveness and historical domination of the global soybean market. But even small differences in transportation costs can give South American soybeans an advantage over U.S. soybeans. Competitors like Brazil are starting to catch up with investment in roads and ports to make their agricultural products more inexpensive – and therefore more attractive to big buyers like China.

Last year, Brazil surpassed the United States as the largest soybean producer in the world while American exports faced duel headwinds of a strong U.S. dollar and Chinese tariffs. Meanwhile, U.S. market share of global soybean trade has actually been declining since the 1990s, in part due to changes in ocean freight rates and the development of Brazil’s transportation infrastructure since 2007.

Getting Food to Market: Roads, Bridges, Dams and Ports

Wherever it’s destined to go in the world, all food starts at the farm. Today in the United States, that often means moving millions of tons of commodities long distances over bumpy roads and structurally deficient bridges, and through crowded ports.

Investment in rural roads, bridges, locks and dams has not kept up with America’s modern agriculture industry. Trade in grains and oilseeds has grown on average between two the three percent per year since 1964. Yet, the United States spends less on transportation infrastructure than during any point since World War II. And infrastructure legislation of the past has often focused on population centers – urban and suburban areas – rather than rural communities whose economies depend on agriculture, and exports.

The situation appears dire once you dig into the numbers. Transportation research organization TRIP’s 2019 Rural Roads Report found that 79 percent of the nation’s bridges that are rated as poor or “structurally deficient” are rural. Altogether, the nation’s rural roads, highways and bridges face a $211 billion backlog in repairs.

Inland waterways move commodities like soybeans to domestic and international markets. But most locks and dams have exceeded their intended 50-year lifespan. The result? In 2017, 49 percent of barges experienced delays – at a cost of nearly $45 million.

In some places, short line railroads are the best or only option for moving agricultural products. Some rural rail lines have closed due to consolidation in the industry. That puts more reliance on trucking to move freight. But more truckers on the road, coupled with aging roadways, means more freight bottlenecks on highways across the United States. In 2016, truck drivers sat in stalled traffic for about 728 million hours at an estimated cost of $50 million.

Rural Broadband is the Next Infrastructure Frontier

Modern infrastructure includes digital connectivity. From following commodity markets to communicating with potential buyers, access to broadband internet is essential for farmers in 2020. Farmers leverage the Internet to improve efficiency, to connect with customers in real-time, and to implement precision technologies that optimize the use of inputs.

Yet, USDA estimates that 80 percent of the 24 million Americans who don’t have access to reliable, affordable high-speed internet are in rural areas. While USDA has ramped up its investment in telecommunications infrastructure, more needs to be done to ensure U.S. farmers remain on the cutting edge of the global economy.

The 2018 report from the Task Force on Agriculture and Rural Prosperity to the White House identified “e-connectivity” as a central pillar for improving the quality of life in rural America. The task force likened the expansion of broadband and precision agriculture to the construction of the U.S. Interstate Highway System of the 1950s, which catapulted productivity and transformed the nation’s economy. Investment in this area will help U.S. farmers compete with other nations like Australia, China and the Netherlands that are already seen as leaders in agriculture technology.

2020 Priorities Aligned

Leaders on both side of the political aisle understand that America’s roads, bridges, and waterways need attention. So why haven’t we done something about it?

Major infrastructure legislation has run into roadblocks at every turn in recent years. While both parties agree there is need for investment, there is little agreement on how to pay for it and what should receive priority for funding. That may change as members of Congress see overlap between infrastructure investment and COVID-19 relief. The agriculture community has been joined by the Western Governors Association, the National Association of Manufacturers and hundreds more organizations in pushing for a long-term infrastructure bill.

The last time that Congress passed a major infrastructure package was the “Fixing America’s Surface Transportation Act” in 2016 – and that expires on September 30, 2020, adding more incentive for Congress to act. In early July 2020, the House passed H.R. 2, the “Moving Forward Act”. Notably, the bill includes grants for rural infrastructure projects and expanding broadband access to under-served areas. But the $1.2 trillion infrastructure plan did not earn bipartisan support.

Where do we go from here? Last summer, the Senate Environment and Public Works Committee advanced its own infrastructure legislation with different priorities. Separately, Senate Commerce Chair Roger Wicker (R-MS) introduced a bill that would accelerate the build out of rural broadband infrastructure. The narrow window for action on infrastructure in 2020 is rapidly closing as we inch closer to the November elections.

Out of Sight, Out of Mind?

If you live in a city, perhaps you haven’t considered the long road that a soybean (or any other farm product) travels on aging roads, bridges, and dams. High speed Internet is something many of us take for granted. So it may be easy to overlook the role that infrastructure plays in helping American farmers find new markets and connecting rural communities with the world.

Renewed investment in roads and waterways, as well as e-connectivity, would make a big impact in rural communities that have been hit hard by the trade war and global pandemic, helping American farmers compete in the global economy.

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Sarah Hubbart provides communications strategy, content creation, and social media management for TradeVistas. A native of rural Northern California, Sarah has melded communications and policy throughout her career in Washington, D.C., serving in government affairs, issues management, and coalition building roles in the agricultural sector. She is an alum of California State University, Chico and George Washington University.

This article originally appeared on TradeVistas.org. Republished with permission.

Archives, Global Trade Daily, In The News, International Trade

President Trump’s Executive Order Ends Hong Kong Country of Origin

July 21st, 2020 Robert Stang, Jeffrey Neeley, Turner Kim, and Camron Greer Leave a comment

On July 14, 2020, President Trump signed into law an Executive Order that ends Hong Kong’s differential treatment compared to the People’s Republic of China (“PRC” or “China”). The President’s action follows the Chinese government’s decision in late May to impose new national security legislation on Hong Kong that outlaws any act of “secession,” “terrorism,” or “collusion” with a foreign power.

The United States government objects to this legislation and believes that it has compromised Hong Kong’s autonomous status, which justified Hong Kong’s differential treatment from China for a number of purposes. As President Trump stated following the signing of the Executive Order, “Hong Kong will now be treated the same as mainland China…no special privileges, no special economic treatments and no export of sensitive technologies.”

As a result of the Executive Order, any imported Hong Kong origin goods will now be considered Chinese origin and will be subject to the Section 301 tariffs on certain Chinese imports, or any antidumping or countervailing duty orders applicable to China.

The Executive Order also eliminates any passport preferences for persons from Hong Kong as opposed to those from the PRC and revokes any Export Administration Regulation (“EAR”) license exceptions for exports, re-exports, and in-country transfers pertaining to Hong Kong. The order also authorizes steps to end other forms of U.S.-Hong Kong cooperation unrelated to international trade, such as the Fulbright exchange program.

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Robert Stang is a Washington, D.C.-based partner with the law firm Husch Blackwell LLP. He leads the firm’s Customs group.

Jeffrey Neeley is a Washington-based partner with the law firm Husch Blackwell LLP. He leads the firm’s International Trade Remedies team.

Turner Kim is an Assistant Trade Analyst in Husch Blackwell LLP’s Washington D.C. office.

Camron Greer is an Assistant Trade Analyst in Husch Blackwell LLP’s Washington D.C. office.

Archives, Global Trade Daily, In The News

USITC Announces New Chairman and Vice Chairman

June 20th, 2020 Beau Jackson Leave a comment

The U.S. International Trade Commission (USITC), a quasi-judicial federal agency that administers U.S. trade remedy laws, has announced new leadership. President Trump designated Jason E. Kearns as Chairman and Randolph J. Stayin as Vice Chairman of the ITC, each for two-year terms effective June 17, 2020. Both Chairman Kearns and Vice Chairman Stayin served as ITC commissioners before these designations.

Chairman Kearns (a Democrat) joined the Commission in March 2018, for a term expiring in December 2024. Before his appointment to the ITC, Chairman Kearns served as Chief International Trade Counsel for the Democratic staff of the U.S. House of Representatives Committee on Ways and Means. Prior to that, he was Assistant General Counsel at the Office of the U.S. Trade Representative.

Vice Chairman Stayin (a Republican) joined the ITC in August 2019, for a term expiring in June 2026. Before joining the ITC, Vice Chairman Stayin had a long career in private legal practice, focusing on trade remedies and trade policy.

Some may be surprised that President Trump designated a Democrat as ITC chairman, but this is controlled by statute. Under 19 U.S.C. § 1330, the President must designate as ITC chairman a commissioner who (1) belongs to a different political party than that of the outgoing chairman, and (2) has at least one year of continuous service as an ITC commissioner by the date of the designation. Moreover, the statute requires that the vice chairman’s political party differ from the chairman’s. Chairman Kearns replaces outgoing chairman David S. Johanson (a Republican), who served as chairman through June 16, 2020, and will remain as a commissioner.

In addition to administering antidumping and countervailing duty investigations and Section 337 actions, the ITC provides the President and Congress with independent analysis and support on matters relating to tariffs and international trade.

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Beau Jackson is a Kansas City-based partner with the law firm Husch Blackwell LLP. He leads the firm’s Section 337 practice.

Archives, Foreign Trade Zones, Global Trade Daily, International Trade

Global Trade Talk: Enhancing US-Korea Trade and Investment Cooperation in a Changing World Environment

June 8th, 2020 Keith Rabin Leave a comment

Global Trade Talk is part of an ongoing series highlighting international business, trade, investment, and site location issues and opportunities. This article focuses on the conversation between Taehee Woo, Vice Chairman, Korea Chamber of Commerce and Industry (KCCI) and Former Vice Minister of Trade, Industry and Energy (MOTIE), Republic of Korea and Keith Rabin, President, KWR International, Inc.

Hello Taehee, how are you? It has been a while since we last talked. Before we begin, can you tell our readers about your background and current activities?

For thirty years I served at Korea’s Ministry of Trade, Industry and Energy in positions including Director-General of the Industrial Policy Division, Assistant Minister for Trade & Chief Negotiator for Free Trade Agreements (FTA), Deputy Minister for Trade, then finally Vice Minister. After leaving the government several years ago, I worked as a professor at Yonsei University before becoming Vice Chairman of KCCI in February 2020.

KCCI is the oldest and largest business organization in Korea. It is composed of 73 regional chambers of commerce and more than 100 major institutions and organizations. This includes approximately 180,000 member companies, ranging from big businesses to SMEs, manufacturing to services, and domestic as well as foreign-invested firms. KCCI is at the forefront of trade promotion by engaging in private-sector economic diplomacy with foreign governments and corporations. Every year we dispatch overseas business missions and organize business forums for visitors to Korea. Through these and other activities we work to expand trade and investment between Korea and other countries around the world.

The Republic of Korea (ROK)’s rise following the devastation of the Korean War was one of the 20^th century’s greatest economic success stories. In little more than a generation, the nation advanced from being one of the poorest countries, to become an advanced modern economy enjoying one of the world’s strongest growth rates. Can you talk about the Korean economic miracle and what allowed this achievement?

The most important factor was the government’s choice of an open, export-led economy. Korea does not possess many natural resources and after the devastation of the Korean War, the government was the leading actor in initiating economic development. Major policies included the “5-year economic development plan” (60s~90s), the “Comprehensive National Physical Development Plan” (70s~90s), the “Saema’eul Movement (also known as the New Community Movement)” (70s) and “Heavy and Chemical Industrialization” (70s~80s). During this period, the government nurtured large exporters as part of its strategy. A trickle-down effect allowed economic growth to flow from large exporting companies to partner SMEs, then to ordinary Koreans. This allowed Korea to grow faster than other developing countries that had a similar start.

I also believe the pioneer spirit, vision and tenacity of early Korean entrepreneurs contributed significantly. There is an expression in Korea, “to serve the country through business”. This guided first-generation businessmen such as Lee Byung-chul (Samsung), Jung Joo-young (Hyundai), Koo In-Hwoi (LG), Choi Jong-gun (SK) in their efforts to bring prosperity to the Korean nation. These men led the “Miracle on the Han” which you reference, advocating “Have you tried it?” (Hyundai/pioneer spirit), “Change everything except your wife and children” (Samsung/innovative thinking) to drive growth forward. Through these efforts key industries including semiconductors, smartphones, automobiles, construction, shipbuilding and petrochemicals were born and enjoyed uninterrupted growth in overseas markets, giving rise and consolidating the position of a ‘Global Korea’.

The dedication and talent of the Korean people has also made an outstanding contribution. Our passion for education is one of the highest in the world. Korea ranks first among OECD countries, with 70% of the 25-34-year-old population holding a bachelor’s degree. The diligence and hard work of the Korean people is also important. Korea has the second-longest working hours among OECD members. During the high growth period centered on manufacturing in the 1970s and 1980s, the input of physical labor acted as one of the driving forces of economic growth.

Previously, the government used to decide which industries to nurture, then distributed resources and applied regulations accordingly. Now that we are past this rapid growth phase, such a strategy is no longer valid. Today, the trickledown effect of exports has declined significantly, and the manufacturing sector is experiencing a slowdown. For this reason, I believe the government’s role should be limited to two things: first, to help individuals spot business opportunities. Second, to ‘renew’ the legal and regulatory system so as to reorganize Korea’s industry around future-oriented service industries and convergence industries.

By the 1990s, China and other lower-cost competitors had emerged, just as ROK living standards were rising. This eroded the nation’s ability to compete on cost as the primary driver. Nevertheless, the ROK has not only maintained its competitiveness but expanded it to where it is now considered one of the world’s most innovative economies. That is true not only in semiconductors, shipbuilding, and automobile production where the ROK has shown traditional strength, but also in R&D, patent activity, smartphones, and other branded products. Now we are even seeing cultural exports such as K-Pop and film, with the ROK production Parasite being the first foreign film to win Best Picture Academy Award. How did the ROK avoid the “middle-income trap” that has affected so many other countries? What steps were taken to allow this continuing transformation?

The first key to avoiding the middle-income trap is innovation and technology, mainly through the adoption and utilization of information and communications technology (ICT). Korea invested extensively in ICT in the late 1990s and early 2000s, building on our earlier success in electronics and semiconductors. This laid a foundation for Korea’s top tier ICT infrastructure, which now includes one of the highest internet penetration, speed, mobile network and cell phone distribution rates in the world. It provided the basis for businesses to build new industries including next-generation semiconductors, cellphones, displays, etc.) as well as advances in conventional manufacturing such as automobiles, shipbuilding, home electronics, and petrochemicals, etc.

Korea also took advantage of the Asian Financial Crisis and the Global Financial Crisis to enhance our capacity and the nation’s economy. Problems such as industrial and financial restructuring and mass unemployment were turned into opportunities to strengthen the competitiveness of our businesses and to catch up to global standards. Not only did Korean businesses achieve technical innovation and accelerate their overseas expansion, but they completely overhauled their practices in accordance with global standards by expanding ethical, transparent management practices, strengthening fair trade and mutually beneficial cooperation.

There are two tasks ahead for the Korean economy to take the next quantum leap. The first is to give a big push to industries of the future by revamping obsolete laws and institutions that were created during Korea’s earlier era of rapid growth. Vested interests became increasingly protected while Korea’s industrial sector was taking root. This legislation now acts as a barrier to business, blocking new initiatives to the point that creating a start-up or venture business in itself is an accomplishment. It seems that due to the COVID-19 outbreak, a social consensus has formed about the importance of the ‘untact economy’ – where face-to-face contact is not needed – and on the need to develop ‘ICT convergence technologies’, which will help serve as the basis for a transformation of our industrial structure.

The second is to build a high-level social safety net. Korea’s GDP per capita exceeds US$30,000. In contrast, social benefit spending as a percentage of GDP is around half (11.1% in 2018) the OECD average (20.1% in 2018). I believe that social benefits can only contribute to economic growth. If the government dedicates state finances to guarantee the basic livelihood and employment stability of the weakest social groups, there will be less resistance toward innovation and change. This change will in turn contribute to job creation and the transition towards future industries. It is imperative we adopt a holistic approach.

We began working together in the early 2000s when you served as Commercial Attaché in New York and our firm represented much Korean government and corporate clients in their efforts to expand trade, investment and targeted transactions including the development of Incheon Airport, New Songdo City and several Special Economic Zones, as well as US firms with an interest in Korea. At the time much of our Korean work focused on overcoming the “perception gap” between Korea’s achievements and a belief its strength was still largely based on OEM production and cheap, substitute products. This served to diminish the value of Korean brands in comparison with their competitors, constraining margins and pricing while introducing a “Korea discount”, which raised borrowing costs and the returns required by investors. Why was it important to raise perceptions of Korea from being a “developing” to an “advanced” nation? How did Korean companies elevate themselves to where firms such as Samsung, Hyundai, and others now possess some of the most competitive brands in the world?

In the early 2000s, Korea’s economic growth was largely based on manufacturing and export of low and medium-priced goods that were useful though without high value-added and we were highly dependent on OEM production for foreign markets – as domestic demand was weak. While Korea’s compounded annual growth rate exceeded 4% for 10 years starting from 2000, geopolitical instability due to North-South relations, the rigidity of the Korean labor market and a need to overcome the effects of the Asian or IMF financial crisis of the late 1990s threw a spanner in the works. This gave rise to the ‘Korea discount’ you mention, which undermined the brand value of Korea, Korean businesses abroad and our borrowing costs.

As a result, we faced a ‘nutcracker’ crisis, where our products were stuck between developed nations and developing countries, and exports of low and medium-priced goods no longer yielded the high growth they delivered in the past. In fact, Korean products were at a disadvantage, from both a price perspective compared to China and an efficiency perspective in comparison with Japan. In other words, Korean goods lagged behind Japanese products in terms of quality and technology and were less price-competitive than Chinese products. Korean brands were also not held in high regard overseas. At that time we would often see Korean products command higher prices as OEM products than under Korean brand names.

Upgrading the national brand was essential in breaking the perception that Korea specialized in low and medium-priced products. To achieve this goal we invested in R&D and technology development so that Korean companies were not undervalued in overseas markets. Building recognition, brand, and both national and corporate images were also of paramount importance, raising awareness and the credibility of Korean products in foreign markets. This had a significant economic impact by improving the competitiveness of our goods. As a result, Korean products now command a premium and according to Brand Finance’s 2019 Nation Brands report, Korea’s brand ranked 9^th in the world, higher than that of Switzerland or Italy.

The strength of Korean companies is based on factors such as active R&D investment, technology development, globalization strategies, and human resources development. Korea ranks 5^th in terms of global R&D investment volume (85.7 trillion KRW), and 1^st in terms of R&D/GDP ratio (4.8%). Our businesses are strengthening Global Korea’s reputation by improving its fundamentals in accordance with global standards. For instance, Samsung’s foldable phone line-up, LG’s Signature TV, and many other Korean products are consolidating a dominant position in the premium market.

When Hyundai Motors first entered the American market in 1986 with its Pony Excel, people thought of it as a ‘cheap car maker’. Now, the company has raised its market share and profile significantly thanks to its continuing ‘quality management’ strategy. Currently, their premium Genesis, Kia, and Hyundai brands occupy the 1^st, 2^nd, and 3^rd position in terms of quality, even before Porsche, according to J.D. Power. Furthermore, Samsung Electronics and Hyundai Motors now own production facilities across the world – with 80% of their total sales coming from international markets. Samsung Group is also actively pursuing global outsourcing of talented individuals to create a more diverse, competitive workforce in recognition of the owner’s awareness that “1% of the talent feeds ten thousand”.

With China and other less-developed countries on our tail, continuing regulatory reform based on public-private partnership is essential to staying competitive. It is important for the government and the business community to work together to reform legislation and institutions that were created in the past era of rapid growth, so that we can give future industries a strong push forward. With the new ‘untact’ economy propelled forward by COVID-19, businesses need to develop innovative Industry 4.0 technologies such as 5G, AI, Big Data, and the government should support these endeavors through regulatory reform.

By operating the Public-Private Joint Regulation Advancement Initiative (PPJRAI), directly housed under the Prime Minister’s Office, KCCI is not only striving to reform regulations but to support technology innovation of start-ups by cooperating with the government through a regulatory sandbox system. This grants waivers and exemptions from regulations that unreasonably hinder the market launch of innovative goods and services.

The ROK was an early proponent of globalization and over time it became a leader in negotiating free trade agreements (FTA), which the nation now has in effect with almost every region including ASEAN, the EU, and Latin America as well as the US, China, India, Australia, and Turkey. How important are these agreements and why has the ROK succeeded where others have failed? What have been the challenges of opening up the ROK economy which has traditionally been viewed as a relatively closed market? Further, given the rise of populism and retreat from globalization seen in recent years, and reliance on trade wars and tariffs as a remedial solution, compounded by a growing belief the US needs to start bringing production back home – a trend which is now accentuated with the coronavirus – how do you view the current trade environment and what do you see moving forward?

Free trade has made great contributions to economic growth and peacekeeping worldwide. Especially over the past 30 years, FTAs have significantly raised individual welfare and living standards. They have not been without side effects, such as the loss of jobs and inequality. Nonetheless, while these negative impacts need to be addressed, the benefits of free trade have been introduced and expanded thanks to the rapid adaptation capacity of the Korean people and businesses, as well as the bold initiatives taken by the government, including multiple, comprehensive FTAs and other mechanisms of bilateral and multilateral cooperation.

The biggest obstacle to opening up Korea, which had been a relatively closed and self-reliant country, has been to convince stakeholders with conflicting interests, especially in the agricultural sector, which is deemed vulnerable to international competition. Still, differences were overcome thanks to a sustained dialogue and efforts to address their concerns and to persuade these entities with national interests in mind and various support systems.

Structural changes that served to slow, and in some cases seek to reverse, global integration were put into motion long before the COVID-19 outbreak. This includes increasing protectionist tendencies, hegemonic rivalry reflected in US-China trade tensions, the crisis of the WTO-led multilateral trade system, transformation of the industrial environment caused by the Fourth Industrial Revolution, and digitalization of the world economy. Among these elements, the evolution of the global value chain and transition from trade in goods to trade in services are of primary importance.

COVID-19 will act as a trigger that accelerates such change and intact business and a stable global value chain will become increasingly valuable. Production reliance on specific countries such as China will diminish, which does not mean supply chain efficiency has become irrelevant. It is possible however to contemplate new supply chain options emerging, that take into account both efficiency and stability, based on country risk. Deglobalization will have the upper hand for a while, which will eventually lead to further digitalization of the global economy in an atmosphere of discord and uncertainty.

The ROK has been credited as having had one of the more effective responses to dealing with the Covid-19 Coronavirus. How is it affecting the ROK’s economy and the domestic and international activities of Korean firms? What is the current situation and what lessons can the US and other nations learn from the ROK’s experience?

The success factors that underly Korea’s COVID-19 response include government efforts, high civic awareness, and dedicated medical staff – who have all contributed to deliver positive results. I believe using the analysis from the MERS outbreak in 2015 to update our prevention system proved particularly useful. Every actor from the field to the control tower moved as one, sharing information in a speedy and transparent manner. This included collaborating among different departments, including the operation of screening centers. Korea’s outstanding health insurance system, which allows for minimal check-up and treatment costs, also played a critical role in containing the outbreak.

Korean test kits and our testing abilities made great contributions not only to the successful prevention of COVID-19 but also to the promotion of Korean medical technology. In April, the Korean healthcare industry exports increased 20% YoY, led by biopharmaceuticals, prevention goods, and test kits. The sales of pharmaceuticals and medical equipment increased by 640 mil. USD (23.4%) and 490 mil. USD (50.8%) respectively.

We also recently experimented with phone consultations and received very positive feedback, which convinced us to implement telemedicine in earnest. We started a little late in this area, but believe Korea will deliver outstanding products in this field based on our unique IT capabilities. K-Bio is also expected to be an important pillar of the Korean industry in the post-COVID era.

China’s emergence as the world’s second-largest economy and its desire to exert more global leadership and power is having profound economic and security implications – not only within Asia but around the world. How do you view the rise of China – both from a geopolitical and policy perspective, as well as in terms of technology, trade, and investment? How is it affecting the activities and plans of the ROK government and other countries in the region? Similarly, how is it affecting Korean firms and their supply chains? What opportunities and concerns do you see developing as a result?

It is true that as the factory of the world, China’s growth has contributed to global economic growth for the past ten years, based on a close-knit relationship with Asian nations. Increased exports to China was also crucial in Korea surmounting the 2008 economic crisis. As an important market and production plant, China will maintain its value in the eyes of Korean businesses and remain part of their business and supply chain base.

At the same time, the global supply chain of various countries took a considerable hit due to the recent surge of protectionism and there is a critical need to diversify to allow more options and less dependence on anyone center of production. As a result, changes in the global value chain and development of the digital economy will likely reduce dependence on China, leading to many new opportunities for additional supply and production destinations.

While the ROK has been a strong ally of the US, with close economic ties since the end of the Korean War, President Trump’s efforts to “Make America Great Again” has caused many changes in US foreign policy and a shift in its focus from multilateral to bilateral dialogue. How have these developments impacted the ROK and how are they changing their relationship with the US? Similarly, how do you view the US administration’s Indo-Pacific strategy as well as its current policy toward North Korea?

Currently, Korea and the US are trying to find a new equilibrium in their relationship with each other. There is still progress to be made regarding the special measures agreement negotiations covering cost-sharing of the US military presence in Korea, but I am confident the two countries will eventually come to an agreement.

In any case, the Korea-US alliance was the foundation of peace and security on the Korean peninsula for more than 60 years, and my firm belief is it will continue to remain so in the future. On May 7th, Secretary of State Pompeo asserted “the US-Korea alliance was the linchpin of peace in the Indo-Pacific region and the world”. The day before our Foreign Minister Kang Kyung-Wha also asserted the government’s intention to “continue collaborating closely with the US on various issues, including COVID-19, based on a strong Korea-US alliance”.

North Korea-US negotiations have been playing a leading role in improving inter-Korean relations, which is why we need to resume dialogue between North Korea and the US. Progress has been slow on the denuclearization front after the Hanoi summit ended without a deal. Nevertheless, the two leaders are still in communication, mainly by exchanging letters.

According to a statement by North Korean leader Kim Yo-jong on March 22, “President Trump sent a personal letter to lay out his plans for stimulating the North Korea-US relations”.

I also hope “COVID prevention cooperation” between the two Koreas among others will provide a new momentum for improving the relations between North Korea, South Korea, and the US. During his May 10th address on the 3^rd anniversary of his inauguration, President Moon also mentioned his “[hope] that South and North Korea will move toward a single community of life and a peace community by cooperating on human security”.

Korean firms – large and small – have been very effective in establishing operations around the world – in both emerging and frontier, as well as developed, economies. What can US companies learn from Korean firms in terms of competing internationally, in particular with developing countries, which despite their problems, will remain a primary source of global growth? Further, what are areas of potential cooperation between US and Korean firms? Should US companies view Korean companies as potential business partners or competitors? Additionally, what kinds of opportunities exist for US firms in Korea and what should they keep in mind as they evaluate and enter this market?

US firms should understand Korea’s success in emerging markets, was not just because their products were affordable, but also because they were customized and localized. You need to establish a presence and research the intricacies of these markets and not treat them as an afterthought. You also cannot talk about Korea’s success story without mentioning the construction boom in the Middle East. Korean businesses blew their clients away – not only with their competitive pricing but by significantly reducing the construction period. In other words, price-competitiveness and speed were the strength of Korean businesses.

Moving forward, I believe Korea and the US can collaborate on areas including building digital infrastructure around the world – with a particular emphasis on the developing economies that are likely to drive global growth moving forward. American platform businesses, Korean start-ups, and our capacity to work in these markets seem a winning combination. Not only to help these countries develop but to provide new high growth opportunities and increases in consumption that do not exist in our own more mature economies. The same could apply to infrastructure such as transportation and construction. This includes cooperation to expand business, trade, and investment into Central and South America, ASEAN countries, Africa, the Middle East, and other regions around the world.

When I was last in Seoul, I was asked to speak on the implications of the Fourth Industrial Revolution, a concept that is rarely discussed or addressed in the US, but gets a lot of attention in the ROK. What are your thoughts on the Fourth Industrial Revolution and how is the ROK and Korean firms preparing to meet the challenges of a rapidly changing business and economic environment?

Korea has achieved great success using a fast follower strategy for growth. Recently, however, the Korean economy has been showing less dynamism, as major industries have been declining while the transition to industries of the future has been slower than we would like.

The Fourth Industrial Revolution is a concept introduced by the World Economic Forum, which calls for a new stage of industrial development that combines the real with the technological world. This is leading to advances, breakthroughs, and convergence in fields such as robotics, artificial intelligence, nanotechnology, quantum computing, biotechnology, the internet of things, decentralized computing, 5G wireless technologies, 3D printing, and autonomous vehicles.

Some worry if we do not embrace the Fourth Industrial Revolution, and China catches up to us, it will only take a split second for Korea to lose its competitiveness. Whether this is the case, Korea’s evolution into a manufacturing powerhouse and shift toward swift informatization and adoption of ICT has prepared us for dramatic change. Building on such experience, the shift toward Industry 4.0 can help introduce a new momentum for innovative growth, provided that Korea is well prepared and we move to address this challenge.

With this in mind, Korea is concentrating its efforts to build an innovative ecosystem and industrial base, so that our strength in manufacturing and advanced ICT can lead to a successful transition that will position us to become a key player in the Fourth Industrial Revolution. Policies and institutions are currently being overhauled to utilize Big Data and foster AI, the core of the Fourth Industrial Revolution. An “AI national strategy” was announced on December 2019 to bridge the gap with leading countries in AI. In addition, the National Assembly passed “Three Data Bills” in January 2020. This will initiate the Big Data industry in earnest through the safeguard of de-identified personal information.

Great strides have also been made in terms of institutional reform. However Korean businesses need to cultivate their adaptive capabilities to allow maximum open innovation. This means moving away from closed down, internal R&D practices, and other practices of the past. While these helped us to develop in the past they now constrain us, and change is needed to allow ideas and technologies to move freely beyond company walls to foster innovation.

Thank you Taehee for your time and attention. I look forward to following up soon.

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Keith Rabin serves as President at KWR International, Inc., a global consulting firm specializing in international market entry; trade, business, investment and economic development; site location, as well as research and public relations/ public affairs services for a wide range of corporate and government clients.

Archives, Global Trade Daily, International Trade

TENSIONS MOUNT BETWEEN SECURITY AND EFFICIENCY IN GLOBAL TRADE

May 28th, 2020 Stephen Olson Leave a comment

The coronavirus pandemic has caused both governments and businesses to question some of the assumptions that have underpinned global trade for decades. By the time the dust settles, the world’s approach to trade could look quite different.

Extended global supply chains brought unprecedented economic efficiencies generated by extreme specialization of production and the ability to reduce costs through just-in-time inventories. These benefits are now being weighed against the risks created by the lack of redundancy and the consequences of severe disruption when key suppliers are not available. Rising economic nationalism and strategic rivalries are prompting multinational companies to rethink their investment and production strategies.

Weighing security over efficiency

In the balance between economic efficiency and security of supply, the pendulum may be swinging back toward security. This shift will apply not only to essential medical supplies and medicines but across the full spectrum of trade. Many automotive production facilities in South Korea, Japan and elsewhere were forced to suspend operations at the onset of the coronavirus outbreak when the flow of critical components from China was interrupted.

Companies may not only rethink supplier relationships. They might also consider further diversifying their own production. Take for example the recently announced decision by Taiwanese semiconductor giant TSMC to build a $12 billion production facility in the state of Arizona, which may represent an attempt to mitigate business risks emerging as a result of geostrategic rivalries, in particular between the United States and China. The compelling economic rationale for TSMC’s Arizona facility is not readily apparent. The costs of semiconductor fabrication are relatively higher when compared to TSMC’s facilities in Taiwan, where the bulk of its manufacturing is done.

Reducing over-dependence on Asia supply chains

The TSMC facility might represent an industry step toward a more U.S.-based high technology supply chain. But there might actually be less to the proposed plant than meets the eye. By the time it is operational in 2024, it is expected to produce semiconductors based on existing (rather than next generation) technologies, and it will lack capacity to produce at a game-changing scale. The 20,000 silicon wafers the Arizona plant is expected to produce each month is only one-fifth the capacity of the larger Taiwan-based fabrication facilities.

However, as the Trump Administration has been vocal in its desire to repatriate elements of vulnerable supply chains wherever possible, the move could also represent an opportunity to hedge against the risk that more production of critical industrial products will be compelled to be manufactured and procured in the United States, something other governments are contemplating as well.

At the recent G20 Finance Ministers meeting in Riyadh, French Finance Minister Bruno Le Maire — a staunch advocate of deepening economic integration — posed a question which just a few years ago would have seemed inconceivable:
“Do we want to still depend at the level of 90 per cent or 95 per cent on the supply chain of China for the automobile industry, for the drug industry, for the aeronautical industry or do we draw the consequences of that situation to build new factories, new productions, and to be more independent and sovereign? That’s not protectionism — that’s just the necessity of being sovereign and independent from an industrial point of view.”

Le Maire’s comment captures the policy debate officials around the world are wrestling with, even in countries that have traditionally been strong pro-trade and pro-integration advocates.

Doubling down on regional trade agreements

Broader strategic considerations were undoubtedly at play in the decision. Taiwan’s position as a global supplier of chips – as well as a highly sensitive flashpoint in U.S.-China relations – means that TSMC is inevitably caught up in the technology and strategic rivalry between the U.S. and China.

TSMC’s investment may not be a bellwether that U.S. companies will re-shore or that multinationals will flock to the United States. More likely, companies will build more diversity into their supply chains with more emphasis on regional trade and less reliance on a single trade partner.

This could have big implications for the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). Although neither China nor the United States are currently parties to the CPTPP, the agreement is a useful vehicle to achieve greater trade and investment diversification for its current members. As a self-selected, voluntary grouping of economies ostensibly committed to promoting trade and investment among members, the CPTPP could provide some degree of insulation against the surge of export restrictions.

With the CPTPP positioned to take on greater relevance in the post-COVID-19 world, Thailand, South Korea, Indonesia and the Philippines have indicated interest in joining. Japan seems to be the informal new member recruitment manager, with Japanese officials already working closely with their Thai counterparts on the mechanics of accession.

Japan’s role is not a matter of happenstance. Japanese officials understand the dangers of over-reliance on a single market. Japan relies on China for about 37 per cent of its imports of automotive parts and 21 per cent of its imports of intermediary goods overall. In light of the COVID-19 disruptions, Japan is making a concerted effort to reduce its supply chain dependencies on China. The recent stimulus bill passed by the Japanese legislature allocated US$2.2 billion to help Japanese manufacturers shift production out of China.

A lasting impact

The COVID-19 pandemic will recede at some point. But its impact on trade will endure. The world can expect to see less China-reliant supply chains and increased use of regional trade agreements, providing a particular boost to the economies of Asia that multinationals see as the alternative to China.

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Stephen Olson is a Research Fellow at the Hinrich Foundation. Over the course of his 25 year international career, Stephen has lived and worked in Asia, the Middle East, and the United States, holding senior executive positions in the private sector, international organizations, government, and academia. He is currently a Visiting Scholar at the Hong Kong University of Science and Technology.

This article originally appeared on TradeVistas.org. Republished with permission.

Archives, Global Logistics, Global Trade Daily, International Trade

TRADE IN A GALAXY FAR, FAR AWAY

May 20th, 2020 Ed Gerwin Leave a comment

Historic launches . . . and customs paperwork

On July 16, 1969, the Apollo 11 astronauts rocketed from Pad 39-A toward a rendezvous with history. Within hours, their massive Saturn V rocket — which churned out as much energy as 85 Hoover Dams — catapulted the astronauts out of Earth’s orbit and on a trajectory to the Moon. But, although Apollo 11 eventually slipped from the grasp of Earth’s gravity, the crew couldn’t avoid the reach of U.S. Customs. Upon their return to Earth, astronauts Neil Armstrong, Buzz Aldrin, and Michael Collins filed one of history’s most unusual trade documents — a customs declaration listing their point of departure as the “Moon” and their cargo as “Moon rocks and Moon dust samples.”

Later this month, Pad 39-A should again witness history when a Falcon 9 rocket boosts astronauts Bob Behnken and Doug Hurley to the International Space Station (ISS) aboard a SpaceX Dragon spacecraft. This milestone launch will be the first time in the annals of spaceflight that a privately owned and launched spacecraft has carried humans into orbit. The Dragon launch—together with rapidly advancing plans to harness the resources on the Moon and asteroids—heralds a new era in which the trade and commercial implications of space are far more complex than the quirky experience of Apollo 11.

Facilitating space exploration

As a general matter, items launched into space are considered to be in international commerce. U.S. Customs, for example, deems the launch of an article into space as an “export” under its regulations.

Over the years, the United States and other spacefaring nations have taken steps to prevent trade rules from complicating space operations. Under a 1984 law, for instance, the United States doesn’t consider articles launched from and returned to U.S. customs territory aboard an American spacecraft to be an “importation” requiring customs entry. Similarly, under the agreement governing the International Space Station, the United States and its international partners have agreed to the duty-free import and export of articles required for the ISS. Like vacationing Earthlings, astronauts do, however, have to clear customs when they travel internationally for spaceflights, although officials hold their passports while they’re in space.

International treaties also establish critical norms for the conduct of nations and their nationals in space. The 1967 Outer Space Treaty forms the basis of international space law. Among other things, that treaty: (i) limits the use of the Moon and other celestial bodies to peaceful purposes, (ii) provides that space is free for exploration and use by all nations, and (iii) prohibits nations from claiming sovereignty over space or celestial bodies. Other treaties govern the rescue and return of astronauts, liability for damage caused by space objects, and the registration of objects launched into space.

The era of space commerce and resources

While this legal framework has generally functioned well during the age of government-dominated space exploration, the rapidly emerging era of space expansion and commerce — in which governments and private firms increasingly harness physical space resources — requires new rules.

Under Project Artemis, NASA, together with private sector and foreign partners, has ambitious plans to return humans to the Moon and establish sustainable, long-term operations there. This will require finding, extracting and using the Moon’s water and mineral resources. In the coming decades, countries and companies will target asteroid resources, extracting water to generate fuel for spacecraft, mining metals like iron and nickel to build equipment in space, and eventually returning rare elements like platinum to Earth. Astrophysicist Neil deGrasse Tyson predicts that asteroid mining could ultimately generate trillions in economic value.

Who owns the Moon?

These efforts will face enormous technical hurdles, and a big legal one: the ongoing inability of the global community to agree on who can extract, use, and own space resources. This conflict dates back to the negotiation of the Outer Space Treaty itself, when the United States rejected the Soviet Union’s position that space should be a commons, where ownership was not possible.

One group of countries and legal experts continues to espouse a global commons approach to space resources, as outlined in the 1979 Moon Agreement. That treaty, which also covers other celestial bodies, provides that the exploration and use of the Moon “shall be carried out for the benefit and in the interests of all countries,” and that the Moon’s natural resources are “the common heritage of mankind” and cannot become the property of any government, organization or person. The Agreement also calls for the eventual establishment of an international regime to govern the exploitation of the Moon’s resources. There are currently 18 parties to the Moon Agreement, most of which are not spacefaring countries.

Other countries, including the United States and Luxembourg, take a contrary view. Under a 2015 law, the United States declared that U.S. citizens engaged in commercial recovery of space resources were entitled to own, use and sell those resources under applicable law. A recent U.S. Executive Order doubles down on this position, reaffirming the right of private parties to exploit space resources, rejecting the Moon Agreement and the global commons, and instructing U.S. officials to seek agreements with like-minded countries on the private exploitation of space resources. The Trump Administration is planning to negotiate “Artemis Accords” with partner countries that would provide for “safety zones” around future Moon bases and rules for private Moon mining.

Proponents claim that these actions don’t constitute a prohibited claim of national sovereignty in violation of the Outer Space Treaty, while others believe that such steps can only be authorized by further international agreement. Russia has denounced recent U.S. actions as an impediment to international cooperation.

Failure to resolve this disagreement could eventually result in growing international and trade conflicts — both on Earth and in space. Nations that maintain that space resources are a global commons might, for example, impose trade or other sanctions on countries or companies that unilaterally mine space resources, or they could ban trade in those resources or their products. Without agreed rules on space mining operations, disputes among space prospectors competing for celestial stakes could, in turn, generate significant terrestrial conflicts.

Even if countries eventually resolve disagreements over rights to space resources, other issues of space trade and commerce will continue to emerge. If a government extensively subsidizes space mining operations by its national companies, for example, will there be a need for global anti-subsidy disciplines like those currently applied to state subsidies for steel production?

Peace in space

At a time of simmering trade wars, pandemic-related trade barriers, and calls to abolish the World Trade Organization, crafting clear international accords for space resources and commerce might appear to be a low-priority concern. But this effort is vital, given rapid advances in technology, the potentially vast value of space resources, and fundamental differences among nations about who can own and exploit them.

Even science fiction calls for action on this issue. After all, as Star Wars fans may remember, a conflict over galactic trade is what kicks off Episode 1 – and the entirety of the Star Wars saga.

Also on TradeVistas: The Global Space Economy is Taking Off Like a Rocket

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Ed Gerwin is a lawyer, trade consultant, and President of Trade Guru LLC.

This article originally appeared on TradeVistas.org. Republished with permission.

Archives, Global Trade Daily, International Trade

Erasing the Global Gains from the WTO Government Procurement Agreement?

March 3rd, 2020 Orit Frenkel Leave a comment

Government purchases are a trillion-dollar opportunity for U.S. businesses

Governments buy a wide variety of goods and services from the private sector, from bridges and road construction to power plants and digital infrastructure to office and hospital supplies. In 2018, global government procurement amounted to $11 trillion or 12 percent of global GDP. The U.S. government procurement market alone was $837 billion in 2010.

While most countries have regulations to ensure government procurement is handled in a fair and transparent manner, procurement processes are susceptible to a high incidence of corruption, particularly in the form of undue influence on the bidding outcomes of public contracts.

Enter global procurement trade disciplines

The first agreement on government procurement – called the “Tokyo Round Code on Government Procurement” – was negotiated in 1979 by a small group of countries who wanted to develop a set of harmonized rules governing public procurement that would set a high standard for transparency and openness. That agreement was subsequently renegotiated as the Agreement on Government Procurement (GPA) in 1994 as part of the creation of the World Trade Organization (WTO), and members agreed to further expand the GPA in 2012. As of May of last year, when Australia became the most recent member to join the GPA, 48 countries were party to the Agreement, with 34 countries having observer status (including 10 of those in active negotiations to join the agreement). The GPA now covers $1.7 trillion in government procurement activities from its member countries.

The GPA includes general disciplines to ensure fair, open and transparent procurement processes for products that exceed a dollar threshold specified by the agreement. Additionally, each country has committed to a “schedule” which specifies which of its entities and purchases are subject to the agreement. Countries typically exclude defense and national security purchases from the agreement as well as set-asides for small, minority-owned and veteran-owned businesses. Disputes under the GPA can be raised through the WTO dispute settlement system.

Some WTO members but not all

The GPA is a so-called “plurilateral” agreement, meaning only a subgroup of WTO member countries are party to it, and therefore the WTO’s most-favored-nation principle does not apply. Rather, the countries that are parties to the agreement grant each other access to their government procurement markets under the terms of the GPA, but that access is not offered to WTO member countries that are not GPA members.

The United States includes similar procurement language from the GPA in its bilateral free trade agreements, like the recently negotiated U.S.-Mexico-Canada Agreement. All told, the United States has procurement agreements with 58 countries, including the GPA countries and countries with which it has separate free trade agreements.

Even for countries that are not GPA members, the rules in the agreement have become the accepted norms for government procurement globally, with most countries aspiring to this level of fairness and transparency, even if they don’t implement the GPA fully.

The relationship between GPA and “Buy American” requirements

Prior to the GPA, Congress enacted a series of domestic content statutes to ensure that public procurement projects funded by U.S. tax dollars benefit U.S. firms and workers. The Buy American Act of 1933 requires federal government procurement of U.S.-origin articles, supplies and material or manufactured products to be produced “substantially all” from domestic inputs. While equipment can have a minimal amount of foreign content to qualify, the allowed amount is extremely low. The act generally also allows a price preference for domestic end products and construction materials.

Buy American requirements may be waived under three circumstances: (1) if a decision is made that it is in the public interest to do so; (2) if the cost of U.S.-made products is unreasonable; or (3) if the products are not available in sufficient quality or quantity from U.S. producers. Since the GPA was negotiated, a fourth circumstance was introduced: Buy American can be waived with respect to procurement bids originating from countries that have provided reciprocal access to their own domestic procurement markets.

A push for expansion?

The Trump administration is reportedly reviewing the benefits of the WTO’s Government Procurement Agreement. As reported to the WTO, the United States offered more procurement opportunities to foreign firms in 2010 (the last year for which data are available) than the next five largest GPA parties combined, which include the European Union’s 27 members, Japan, South Korea, Norway and Canada. The United States may open as much as 80 percent of federal contracts to foreign suppliers, whereas the European Union, Japan and Korea may open somewhere between 13 and 30 percent of central government contracts to foreign suppliers.

However, a U.S. government review that offered those calculations also points out that lags and inconsistencies in foreign government data reporting, data gaps, and a lack of methodology for reporting on sub-federal procurement, make it difficult to determine GPA benefits with accuracy.

And while foreign suppliers are able to compete for certain U.S. government contracts, the GPA and bilateral free trade agreements enable U.S. companies to compete in the nearly $2 trillion dollar government procurement market in the other signatory countries, an opportunity that would be significantly limited by withdrawal from the GPA. In many cases, such as sales of medical devices and medicines to state-run hospitals, software for government agency use, sales of power equipment, and the construction of hard infrastructure, the GPA offers the primary form of access by U.S. companies to foreign markets.

Worse than losing reciprocity

Ironically, American withdrawal from GPA would also complicate the ability of U.S. companies to sell their products to the U.S. government. Very few U.S. products today are 100 percent American. Supply chains of U.S. companies are increasingly global, meaning that even products manufactured within the United States are likely to have non-U.S. components or materials. Today, U.S. companies selling equipment to the U.S. government containing non-U.S. content from a GPA signatory country are not subject to the Buy American Act. However, if the United States were to withdraw from GPA, Buy American regulations would apply, potentially disqualifying U.S. companies from selling products that contain foreign content to the U.S. government.

Participation in the GPA not only maintains U.S. companies’ ability to compete for foreign contracts, it also gives the U.S. government leverage to negotiate greater market access under better terms by seeking to expand coverage. This may be particularly important as economies grow around the world and begin to spend higher percentages of their budgets on government procurement. Also, the race is on to set technology standards around the world such as 5G. If U.S. companies cannot bid to secure government contracts, they may find themselves on the outside of key growth markets, ceding them to competitors from Europe, Canada, Japan and China.

Another way to improve the WTO

While the global trade rules in the GPA seem like an arcane subject, the agreement has had a profound impact on government procurement practices globally. It opened an enormous government procurement market for the signatory countries – including the United States – and created a set of open and transparent regulations that even non-signatories countries work toward. Working within the agreement to improve and expand coverage would benefit U.S. suppliers not just to compete overseas, but to compete for contracts here at home.

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Orit Frenkel is the Executive Director of the American Leadership Initiative, which is advancing a new smart power paradigm of American global leadership. She is also the President of Frenkel Strategies, a consulting firm specializing in trade and Asia. Previously she spent 26 years as an executive for GE and before that as a trade negotiator at the Office of the U.S. Trade Representative.

This article originally appeared on TradeVistas.org. Republished with permission.

Archives, Global Trade Daily, International Trade

Trump Signs USMCA Into Law But Not Everyone is Cheering

February 21st, 2020 GT Staff Leave a comment

President Donald Trump signed the United States-Mexico-Canada Agreement (USMCA) into law at a Jan. 29 White House ceremony, officially canceling the North America Free Trade Agreement (NAFTA). “The USMCA is the largest, most significant, modern, and balanced trade agreement in history,” Trump told admirers and the press. “All of our countries will benefit greatly.”

“Thanks to the unyielding dedication of President Trump, the United States will now have a fair and reciprocal trade agreement with Mexico and Canada,” reacted U.S. Secretary of Labor Eugene Scalia. “USMCA will bring jobs, increased trade and stronger economic growth to our already record-setting economy, growing GDP by as much as $235 billion and adding as many as 500,000 new jobs.

“President Trump has delivered on a promise,” Scalia continued. “This historic agreement will level the playing field for American workers, preparing American businesses for the demands of a 21st Century economy. The Department of Labor stands ready to fully implement USMCA to the benefit of American workers.”

An independent report by trade credit insurer Atradius found the USMCA “has reduced trade policy uncertainty in North America, shielding Mexico and Canada from any global tariffs on cars the U.S. might impose on national security grounds.”

But not everyone was cheering. “USMCA is only marginally better than previous trade deals and doesn’t do nearly enough to create American jobs, increase workers’ wages, or protect workers and the environment,” states Groundwork Collaborative, an initiative dedicated to advancing a coherent, persuasive progressive economic worldview and narrative. “Trade is like every other economic issue: It is only really working when it is working for ALL people, not just the wealthy and well-connected. USMCA doesn’t meet that standard and is a major missed opportunity.”

Archives, Global Trade Daily, International Trade, Stories

Are You Prepared for the Outcome of the U.S.-China Trade War?

February 20th, 2020 Donald Gross Leave a comment

For exporters, importers, manufacturers and investors who are heavily involved in U.S.- China trade, the recent agreement provides potentially immense benefits – but still doesn’t end their uncertainty or anxieties about what the future may bring.

Every participant in U.S.-China trade should now be reassessing his or her own expectations and strategic plans for not only surviving the trade war but, as importantly, for maximizing business success.

Clearly, preparation is essential for businesses to thrive and avoid suffering substantial harm at a time when critical political, economic and legal factors beyond a company’s control are constantly changing.

To help business owners and senior executives shape business and legal strategies tailored to their company operations, I’ll first clarify what the U.S. and China have decided and what is still in play. I’ll then lay out possible scenarios and the strategic approaches that executives should consider taking to protect themselves and position their businesses for future success.

The New Phase 1 Agreement

Under the signed agreement China will:

-Buy at least $200 billion of additional US exports in goods and services over the next two years, on top of amounts it imported in 2017, in the following areas:

-$78 billion of manufactured goods including vehicles and industrial machinery

-$52 billion of energy products, including crude oil and LNG

-$32 billion of agricultural and food products

-$38 billion of financial and business services

-Open its financial sector by abolishing limitations on foreign ownership of Chinese securities by April 1, 2020 and ensure market access on a non-discriminatory basis for US securities, insurance and fund management companies.

-End its longstanding practice of requiring US companies to transfer technology to Chinese companies as a condition for obtaining market access.

In exchange, the U.S.:

-Suspended a planned tariff scheduled to go into force on December 15^th covering $156 billion of apparel products (Tranche 4B) and lowered the tariff rate from 15 percent to 7.5 percent on another group of apparel products (Tranche 4a)

The signed Phase 1 deal also requires China to:

-Adopt an action plan to make major structural changes for protecting US intellectual property

-Implement a dispute resolution mechanism that puts in place “strong procedures” for the US and Chinese parties to resolve disputes fairly and expeditiously

Under the Phase 1 agreement, the U.S. will maintain its current tariffs of 25 percent on $250 billion in Chinese products and 10 percent on an additional $300 billion of Chinese consumer goods.

FUTURE SCENARIO #1:

The U.S. and China Reach a Phase 2 Deal & Comprehensive Settlement

Without question, the Phase 1 agreement signed on January 15th is a game-changer for U.S.-China trade relations – the likely beginning of the end of the trade war.

Phase 1 represents the first time since the opening shots of the trade conflict, approximately 20 months ago, that the parties have found common ground and enshrined it in a binding legal agreement. With public expectations for a complete settlement raised by both President Trump and President Xi, negotiators are now incentivized to reach agreement on the remaining U.S. and Chinese demands.

Even though most previously existing tariffs still remain in place, it is now realistic to anticipate a broad negotiated settlement in a Phase 2 deal that includes a sharp reduction in tariffs, Chinese implementation of necessary reforms, and a far more balanced U.S.-China trade relationship. A settlement of this kind would significantly expand business opportunities for American companies to export more products to China and to import more Chinese products to the United States.

Consequently, both exporters and importers can and should now formulate and implement plans as part of their business strategies for improved trade relations with China that seemed highly unlikely and unrealistic only a few weeks ago.

U.S. Importers

To prepare for the possible elimination of high tariffs imposed by the U.S. and China during the trade war as well as other beneficial reforms, key executives of U.S. importers should ask the following questions:

-How can we expand the quality and quantity of Chinese products we import?

-To what extent will a sharp reduction of tariffs improve the competitiveness of the products we import in various S. market sectors?

-If Chinese companies curtail their practice of forcing transfer of U.S. intellectual property, how will this help us expand our China-based supply chain?

-If the Chinese government significantly reduces its subsidies for competitive Chinese companies, what kind of openings for increased imports will this create?

-In what ways can and should we encourage our Chinese business partners to invest in the U.S. by building factories here for which our company could handle marketing and distribution?

U.S. Exporters

To take advantage of China’s Phase 1 agreement to buy $200 billion in U.S. export products during the next two years on top of amounts it imported in 2017 as well as to prepare for the elimination of high tariffs in Phase 2, key executives of U.S. exporters should ask the following questions:

-How can we expand the quality and quantity of products we export to China?

-In what sectors of the Chinese market will the products we export become more competitive?

-How will the potential reduction of government subsidies to our Chinese competitors allow us to penetrate the China market more effectively?

-In what areas should we explore new relationships with Chinese companies for producing finished products that include the American intermediary goods we export?

-To what extent will a full Phase 2 settlement of the trade war and the reforms accompanying it enable the U.S. government to modify the controls it currently imposes on specific exports?

FUTURE SCENARIO #2:

The U.S. and China continue their negotiations for a Phase 2 deal but find it difficult to reach agreement

Despite agreement on a Phase 1 deal, the tensions and uncertainty of U.S.-China negotiations mean the U.S. and China may face complications and delays reaching a meaningful Phase 2 deal requiring new Chinese commitments and an end to high U.S. tariffs.

Factors that could slow down the process of reaching a Phase 2 agreement include various threats by the Trump administration:

-Delisting Chinese companies from S. stock exchanges

-Blocking a range of public and private pension funds and university endowments from making certain investments in China

-Putting other capital controls on U.S. private sector investment in China to protect against opaque Chinese company accounting and business practices

-Broadening scrutiny of potential Chinese investments in the United States on national security grounds

-Expanding checks by the Securities and Exchange Commission (SEC) of Chinese companies that do business in the S.

-Disrupting the flow of capital between Hong Kong and mainland China if China does not adequately respect the autonomy of Hong Kong

Each of the U.S. measures described above would likely cause China to take reciprocal retaliatory actions – just as China has responded to U.S. tariffs with reciprocal tariffs of its own on American products.

At stake in the Phase 2 negotiation are issues that will determine whether the Trump administration achieves its core objectives in the trade war, including:

-Stricter rules to strengthen information security for cross-border data flows of American companies that do business in China

-Limiting the subsidies by China’s government to state-owned companies which facilitate unfair competition

The issue for Phase 2 that is likely of greatest importance to American importers is whether an agreement removes U.S. tariffs on more than $500 billion in Chinese products that threaten the well-being of their businesses.

Given the uncertainty of reaching a follow-on Phase 2 agreement, key executives of U.S. importers and exporters should ask the following questions:

U.S. Importers

-If a Phase 2 agreement with China does not materialize, how should we plan to modify the sourcing of products we currently import from China to avoid high tariffs?

-What kind of exploratory discussions with suppliers outside China should we initiate as a hedge against uncertainty and continuing tension in S.-China trade relations?

-To prepare for a possible shift in import strategy, should we participate in the Customs Trade Partnership Against Terrorism (CTPAT) program that reduces the number of Customs examinations, accelerates Customs processing times and expedites border crossing privileges?

-What measures can we take to lower cost and raise efficiency to improve the competitiveness of Chinese-origin products in the S. market?

-Does our supply chain include middlemen who resell products to us at a marked-up price? If so, can we utilize the established “first sale rule” under U.S. law that allows us to avoid paying any duty on the amount of the mark-up?

U.S. Exporters

In light of continuing uncertainty about the Phase 2 negotiations, exporters should ask themselves:

-How can we modify the quantity and type of our exports to China in light of unfair competition from state-owned companies receiving government subsidies?

-If existing Chinese tariffs remain in place for the foreseeable future, how will that affect sales of our products in the Chinese market?

-How will increased U.S. controls on exports of American products to China affect our business strategy?

-If the U.S. imposes new tariffs on China and China retaliates, how can we manage and mitigate the likely negative impact on our sales in China?

-In light of the trade obstacles we now face and may continue to face, how should we modify our export strategy for China?

FUTURE SCENARIO #3:

The U.S. and China break off discussions on a final Phase 2 settlement of the trade war after negotiations fail and they pursue hostile trade policies toward each other

If the U.S. and China cannot reach a meaningful trade agreement in 2020, it is likely they will break off negotiations and pursue hostile trade policies toward each other. In this case, some or all of the following economic and political developments are likely to occur:

-The trade war will evolve into a major, multifaceted dispute – the equivalent of a cold war – that involves geopolitical and security disputes as well as trade issues

-Both the U.S. and China will find it difficult to stop a vicious cycle of retaliation and counter-retaliation on trade and other issues

-China and the S. will strive to consolidate their own trade blocs that exclude the other country – potentially decoupling the U.S. and Chinese economies/financial sectors

-China will enhance the role of its state-owned businesses using increased subsidies

-The U.S. will significantly expand its restrictions on trade with China by delisting Chinese companies from U.S. exchanges, blocking public and private U.S. investments in China, enacting much more restrictive export controls, ending most Chinese investment in the United States, exercising greater scrutiny by the SEC of Chinese companies and taking other restrictive measures

Outlook for Importers and Exporters

While future events could potentially reignite the trade war and eventually lead to a breakdown in U.S.-China relations, this dire prospect should not be the immediate focus of planning and preparation by importers, exporters, manufacturers and investors. The collapse of normal economic and trade relations represented by Scenario #3 is only likely to occur after China and the U.S. go through an extended period of uncertainty, tension, and deterioration in trade relations described in Scenario #2.

Companies involved in U.S.-China trade should therefore base their business and legal planning on the high probability that the trade war will likely evolve either toward a settlement of most outstanding issues or toward continuing uncertainty characterized by the inability of negotiators to resolve remaining differences.

It would be a major mistake at this time to take a “wait and see” approach or bet exclusively on either Scenario #2 or Scenario #3 coming to pass.

For this reason, importers, exporters, manufacturers and investors should focus on modifying their business/legal strategies to take advantage of the potentially immense benefits of the Phase 1 agreement and preparing contingency plans for either a Phase 2 agreement or the occurrence of Scenario #2 in trade negotiations with China – the two scenarios that are most likely to materialize between now and the end of 2020.

______________________________________________________________

Donald Gross is founding partner of Donald Gross Law, an international trade law and strategy advisory firm in Washington, D.C. (https://www.donaldgrosslaw.com). He participated in U.S. negotiations with China as a Senior Adviser for International Security Affairs at the State Department from 1997 to 2000, and as Counselor of the U.S. Arms Control and Disarmament Agency from 1994 to 1997. He is the author of “The China Fallacy: How the U.S. Can Benefit from China’s Rise and Avoid Another Cold War” (Bloomsbury, 2013). He can be reached at don@donaldgrosslaw.com.

DO AMERICANS WANT THE U.S. TO LEAVE THE WTO?

TradeVistas’ inaugural survey of Americans’ attitudes toward trade shows a plurality support the idea, but most Americans seem unsure of the WTO’s role

A plurality of Americans support leaving the WTO – but almost as many are “unsure” or “indifferent.”

When voters understand the role of the WTO, they are more likely to be supportive of it.

Americans want the U.S. to lead the global economy – but don’t see how the WTO can help.

Conclusions

Download the infographic:

On the Surface

The Transportation Cost Edge

Getting Food to Market: Roads, Bridges, Dams and Ports

Rural Broadband is the Next Infrastructure Frontier

2020 Priorities Aligned

Out of Sight, Out of Mind?

Weighing security over efficiency

Reducing over-dependence on Asia supply chains

Doubling down on regional trade agreements

A lasting impact

Historic launches . . . and customs paperwork

Facilitating space exploration

The era of space commerce and resources

Who owns the Moon?

Peace in space

Government purchases are a trillion-dollar opportunity for U.S. businesses

Enter global procurement trade disciplines

Some WTO members but not all

The relationship between GPA and “Buy American” requirements

A push for expansion?

Worse than losing reciprocity

Another way to improve the WTO

The New Phase 1 Agreement

FUTURE SCENARIO #1:

The U.S. and China Reach a Phase 2 Deal & Comprehensive Settlement

U.S. Importers

U.S. Exporters

FUTURE SCENARIO #2:

The U.S. and China continue their negotiations for a Phase 2 deal but find it difficult to reach agreement

U.S. Importers

U.S. Exporters

FUTURE SCENARIO #3:

The U.S. and China break off discussions on a final Phase 2 settlement of the trade war after negotiations fail and they pursue hostile trade policies toward each other

Outlook for Importers and Exporters

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